By Travis Fast
So now that the US is all but confirmed to be in a recession, with any further cuts by the FED likely to have the effect of pushing on a string, we will get a chance to test the silly idea that the Canadian economy is somehow delinked from the fortunes of the US economy. Why is it a silly thesis you may ask?
1) Our resource and manufactured exports are for the most part with the US.
2) High commodity prices are somewhat offset due to the decline of the US dollar.
3) Outside of Alberta and the mining sector high commodity prices are not sufficient to keep the CDN economy treading above water.
4) Because a serious recession in the US will dampen demand across the world as the US moves away from being the consumer of last resort global commodity prices, save for precious metals, will decline along with global demand.
5) As unemployment trends up, consumer spending and house prices will begin to stall-out if not begin to trend-down in Canada.
6) Outside of a couple of geographic regions largely in the west: the Greater Vancouver Area (GVA), parts of Alberta and the Prairies Canada will enter a recession.
Given these relationships it is most likely that Canada will find that it is temporally but not materially out of phase with the US economy, i.e., there will be a time lag but not a de-linking.
As I pointed out in previous post, the conservatives have already spent their fiscal guns on tax reductions and they are thus going to be faced with two choices once they realize the impotency of monetary policy: Deficit spending or program cuts.
The former is ideologically unpalatable for the Cons (although the Republicans have shown that deficits are OK as long as they are caused by tax cuts for the rich) and the latter is pro-cyclically anti-simulative.
The problem here is that neither the central bankers nor the Conservatives believe in the usefulness, nay the necessity of fiscal policy.